Zoo Station

Back when I was working on the RISC project, I had the opportunity to meet and discuss the idea with Raghuram Rajan, who had recently joined the IMF as chief economist. After the meeting, I remember telling my colleagues that he was one of the smartest people I had ever met. Since then, Rajan has settled well into his role as the youngest chief economist at the Fund. The Chicago Tribune is carrying a story in which Greb Burns discusses the global economy with Rajan. In fact, it is a profile of one of the most important men in global finance today and one who could end up being finance minister of India in the not-too-distant future. So, if you don't know much about Rajan, this is a good place to start.

On loan to the International Monetary Fund, where he became the youngest-ever chief economist and the first from a developing country, the 42-year-old native of India sees risks on the rise in housing markets, hedge funds, pensions--all across the seemingly tame landscape of world finance. Difficult to track and often disguised, the steady accumulation of risks has increased the odds of what Rajan cautiously terms "a greater (albeit still small) probability of a catastrophic meltdown." A sharp decline in home prices, for instance, could cripple the job market, trigger loan defaults, hurt anyone invested in mortgage securities, and eventually undermine every moving part of the interconnected financial system.
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What to do? Surprisingly for a dedicated advocate of free markets in the University of Chicago tradition, Rajan believes more government regulation is needed. After decades of deregulation and laissez-faire policies, "We are in danger of the pendulum swinging too far," he said. "The times have changed."

You could also read Rajan's magnificent book (with Luigi Zingales), Saving Capitalism from the Capitalists.